China’s Gold Demand Growth Seen Stagnating as Price Drops

By Bloomberg News -
May 11, 2012

Gold demand growth in China, the
second-largest consumer, may stagnate this year as declining
prices put off investors and slower economic growth crimps sales,
according to the mainland’s biggest gold-jewelry maker.

“The volatility and decline in the gold price since
September, and the slower economic growth, have led to some
subtle changes in the Chinese consumers’ attitude,” Lao Feng
Xiang Co. (900905) Vice President Xin Zhihong said in an interview. Still,
sales at the Shanghai-based jeweler that was founded in 1848 may
grow at least 20 percent this year, Xin said in an interview.

Stagnating demand growth in the second-largest economy may
help to extend the precious metal’s 18 percent slump from a
record and derail a World Gold Council projection that China may
displace India as the top user on an annual basis this year.
Demand in China expanded 20 percent last year from 2010, and has
risen 96 percent since 2008, according to council data.

“It’s the worst start of the year since the financial
crisis in 2008,” said Emily Li, brand general manager at Chow
Sang Sang Holdings International Ltd. (116), referring to conditions
for the industry as a whole. The company is Hong Kong’s second-largest gold and gem-set jewelry seller by market capitalization.

Immediate-delivery gold dropped as low as $1,573.82 an
ounce today, the lowest level in four months, as weaker economic
data from Asia and Europe’s resurgent debt crisis boosted the
dollar. The price, which reached an all-time high of $1,921.15
last September, was at $1,578.89 at 9:29 a.m. in London.

‘Cash in Their Hands’

“The expectation that gold prices will always rise and
that gold’s value can only appreciate seems to have faded,”
said Xin at Lao Feng Xiang, whose company name translates as Old
Auspicious Phoenix. “Some consumers are now sitting on the
sidelines with cash in their hands, pondering whether to buy.”

China’s economic growth, hurt by a property-market slump
and weaker exports, declined to 8.1 percent in the first quarter,
the slowest pace in almost three years. The slower rate of
expansion has helped to hurt commodity prices, with the Standard
& Poor’s GSCI Spot Index (SPGSCI) of 24 raw materials giving up this
year’s gains today as China’s industrial output slowed.

China consumed 769.8 metric tons of gold last year in
jewelry and investments by individuals, from 639.2 tons in 2010
and 392.7 tons in 2008, according to data from the producer-funded council. The world’s largest consumer of energy and base
metals may overtake India this year as the biggest user on an
annual basis as surging incomes drive increased demand, the
group forecast in February.

‘Not That Optimistic’

“I’m not that optimistic about the whole market,” Xin
said yesterday in Shanghai, where he’s attending a trade fair.
“We’ve seen the signs since the last quarter in 2011, that
Chinese consumers share a quite pronounced tendency in which
they usually buy gold when prices are rising and refrain from
purchasing when prices are conceived to be on a downtrend.”

Goldman Sachs Group Inc. said this week gold may be set to
rebound over the next six months, sticking with a forecast for
the metal to rally to $1,840 an ounce on the Comex in New York.
The gain may be driven by additional easing from the U.S.
Federal Reserve next month, Goldman said in a report, which also
cited signs of increased demand from buyers in China.

Mainland China’s gold imports from Hong Kong surged more
than sixfold in the first quarter to 135.53 tons, according to
data from the Statistics Department of the Hong Kong government
this week. Shipments in March rose 59 percent from February.

“We’ve been in this business over 70 years and we’ve seen
cycles,” said Li at Chow Sang Sang. Company sales in the
mainland grew by more than 10 percent in the first quarter from
a year ago, aided by purchases linked to the Year of the Dragon
she said, referring to the current lunar year that’s associated
with wealth and power and is popular for weddings and births.